Indian Corporate Governance: Will SEBI successfully plug all the gaps?

This is further to my blog post on independent directors. SEBI is looking to go beyond the provisions of the Bill, and further tighten the norms of corporate governance. Additional responsibilities and obligations will be cast on independent directors.

SEBI is of the view that any code of Corporate Governance must be dynamic, evolving and should change with changing context and times. To this end SEBI has issued a consultative paper on corporate governance on January 4, 2012. SEBI acknowledges that most of its proposals to strengthen corporate governance are already included in the Companies Bill, 2012. SEBI, from time to time, is in receipt of the suggestions and clarifications from the industries to review the corporate governance code. To keep pace with the changing expectations of the investors, shareholders, and other stakeholders, all such suggestions received are placed before the Primary Market Advisory Committee (PMAC) or SEBI Committee on Disclosure and Accounting Standards (SCODA). Subsequently, these suggestions are taken to SEBI Board and necessary amendments are carried out to extant regulations/Listing Agreement.

Though some of these proposals are already provided for in the Bill and the Bill is awaiting parliamentary nod, SEBI proposes to advance the implementation of these proposals to listed companies to make them acclimatized to these provisions.

SEBI proposes to retain all the provisions in the Listing Agreement that more stringent than those proposed under the Bill. For instance, the Bill proposes that majority of the members of the audit committee shall be independent directors. The listing agreement provides for a two-thirds majority. The latter is proposed to be retained in the listing agreement being a higher or more stringent requirement.

In the event that any of the provisions in the Bill are stricter than the provisions of the listing agreement, the provisions in the Bill shall be retained and the Listing Agreement shall be amended to bring it in line with the Bill. Also, certain additional changes are proposed in Clause 49 of the Listing Agreement. Some such amendments are provided below:

• An independent director of a listed company shall apart from complying the criteria of independence specified in the Bill, also comply with the following conditions:

1. He is not related to or having material pecuniary relationship with key managerial personnel;
2. He is not a material supplier, service provider or customer or a lessor or lessee of the company, which may affect independence of the director;
3. He is not less than 21 years of age.

• Independent directors are required to declare that their appointment is in compliance with the Bill as well as the listing agreement.
• The Boards’ report shall contain the methodology/details of training imparted to independent directors so as to enable them to comply with their duties under Code, particularly in respect of independent directors obtaining appropriate induction and regularly updating and refreshing their skills, knowledge and familiarity with the company. The requirement of training itself shall continue to be under non-mandatory provisions.
• Criteria for performance evaluation by peers of the independent directors are also proposed to be provided. Clause 49 of the Listing Agreement may require that such evaluation report of the independent director should also be based on his attendance and contribution to the board/committee meetings and such appraisal shall be placed before the nomination committee for taking decisions for reappointment.

Other Possible Developments

Certification course: In addition, SEBI proposes to conduct a certification course and training for independent directors. SEBI has established National Institute of Securities Markets (NISM), which jointly works with the Global Corporate Governance Forum of International Finance Corporation in conducting workshops on various aspects of corporate governance in addition to conducting certified course for various market participants. A separate course for independent directors may be devised by NISM covering their role, liabilities, expectations from various stake holders, internal controls, risk management systems, business models and independent directors may be mandated to clear such courses, before their appointment. Apart from conducting induction courses, NISM may also conduct training/ review courses for independent directors. Responsibility is also cast on the company to ensure that independent directors have been appropriately inducted into the company and briefed about the company, its environment etc.

Diverse Representation: SEBI is keen that the board composition of listed companies contains diversity. To this end, SEBI will be examining whether to make the nomination committee responsible for ensuring that persons from divergent background and gender are nominated for maintaining board diversity.

Full Disclosure: Where non-executive directors are removed or made to resign on account of differences with the Board, no disclosure is required for the rational for such removal or resignation. SEBI wishes to plug the gap by mandating that the reason for the resignation of the independent director should be submitted to the Board of the company, which in turn should circulate the same to the shareholders and inform the stock exchange in this regard.

Restriction on Number of Directorships: In order to offer independent directors the necessary time to fully understand and appreciate the concerns of the company to which they belong, SEBI is considering whether to restrict the number of directorships of a person in public companies to 7, in keeping with the voluntary guidelines of MCA. It is to be noted that the Companies Bill, 2012 provides for a maximum of 10 directorships.

Looking Ahead

It will be interesting to see what Clause 49 looks like in future. Clause 49 would require to be aligned with the Bill as well as contain prescriptions in the manner outlined above. In any event, one can say with certainty that all of these changes are going to increase the burden of compliance on companies. At the same time, we can be hopeful that these changes would lead to greater and more effective investor protection.